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Hard Brexit poses volatility risk, says CFSGAM

Killian Plastow

— 1 minute read

19 January 2017

Global markets can expect ongoing volatility and uncertainty following British Prime Minister Theresa May’s confirmation that the UK will leave the European single market, Colonial First State Global Asset Management has said.

Ms May said in a speech on Tuesday that the government’s proposals for a post-Brexit UK “cannot mean remaining in the single market”.

Speaking to InvestorDaily, Colonial First State Global Asset Management economic and market research analyst Carlos Cacho said the decision for the UK to give up access to the single market was something markets had “been expecting for some time”.

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“It’s what the market is calling a hard Brexit, or Theresa May and her spin doctors are trying to transition the phrase to a ‘clean’ Brexit; exactly what it means is not too clear yet – it probably means more uncertainty,” he said.

Mr Cacho said the pound is likely to experience “further volatility and weakness” as the negotiations get underway, driving higher inflation and subsequently higher bond yields.

“In terms of the impact to Australian investors, obviously any pound denominated investments are going to be affected, and a few Australian companies that do have a presence in the UK will be affected, but the impacts on our market are more likely to be driven by sentiment and uncertainty around the Brexit,” Mr Cacho said.

“Particularly concerning for us is if it really drags on for a long time and starts generating more uncertainty and volatility in Europe in general, that might flow on to other markets.”

Mr Cacho said this was likely, as it is “highly doubtful” trade negotiations between the UK and the EU will be completed within the two years the former will be given once the exit process commences.

“My expectation would be, at the end of the two years, the two most likely outcomes are that we see either a hastily cobbled-together patchwork of sector by sector deals that kind of covers some areas in the UK but is likely to lead to some significant disruption, or that you see some kind of modified and temporary version of a European economic area agreement,” he said.

Mr Cacho warned investors to consider how markets will react to news around the negotiations moving forward, noting that while “these things can happen quite slowly”, markets often react to news quickly.

“It’s not just about picking what’s going to happen and what the election results are going to be, and what the data is going to be, but it’s about figuring out what the markets are going to do and how it’s going to react to it, as well as what’s already priced in,” he said.